Chapter 6 Summary: Trial Balance and Financial Statements

Trial Balance

• A trial balance is a list of all the assets, liabilities, capital, income, and expenses of a business.
• These are listed in debit and credit columns.
• All ledger accounts in the general ledger are recorded in the trial balance, either in the debit or credit columns.
• If double entry is correct, the trial balance will balance (debits should equal credits).

Statement of Profit and Loss vs. Statement of Financial Position

• The Statement of Profit and Loss shows all the income and expenses.
• The Statement of Financial Position shows all the assets and liabilities of a business.
• The Statement of Profit and Loss is likened to a video or DVD, showing what’s happening over a period of time.
• The Statement of Financial Position is like a photograph—a snapshot of the business at a point in time.

Accounting Equation

• The basic accounting equation is: Assets = Capital + Liabilities.
• Rearranging the equation: Assets - Liabilities = Capital + Profit - Drawings.
• Assets minus liabilities is net assets.
• Capital plus profit less drawings represents the owner's interest in the business, also known as the proprietor's interest.